The dynamics of social entrepreneurship

The dynamics of social entrepreneurship

In 2006, Nobel Peace laureate Muhammad Yunus in his acceptance speech had outlined the importance of social business in the world – ‘Social business is important because it addresses very vital concerns of mankind. It can change the lives of the bottom 60 per cent of world population and help them to get out of poverty.’ Yunus, founder of Bangladesh’s Grameen Bank (a micro credit institution) goes on to mention that the challenge for social entrepreneurs lies in innovating business models and applying them to produce desired social results, cost-effectively and efficiently. India has seen a new breed of entrepreneurs who are just as concerned about impacting the society as they are about reaping dividends. But as such enterprises come into being, how many of them stand the test of time depends on an entrepreneur’s focus and ability to build a business proposition to a fluctuating market and social dynamics.

“There is very little venture capital going into companies that focus on bottom of the pyramid (BoP), who are people earning less than US $2/day and they constitute 25 per cent of India.”

“If the business model and the value proposition of a company are on target, then there is definite long-term sustainability,” says Vishal Vasishth, managing director of Song Investment Advisors India (Song), a SME (small and medium enterprises) – focussed fund. Song backs ventures that are into solving problems with a focus on health, education, agriculture, clean tech and financial inclusion. It hopes to invest US $ 17 million in about five companies soon.

However, experts are also of the opinion that the social wave India is riding is only the beginning and signs of maturity are yet to manifest themselves. Vishal Mehta, co-founder and partner of Lok Capital, a fund with focus on social and financial inclusion, says some of the business models of social ventures that existed a couple of years ago have shown signs of becoming more established. “India is still witnessing only the early stages of such ventures and the benchmark for long-term sustainability is too soon to gauge. Even in the microfinance sector, which has seen a lot of activity last year, only four IPOs (initial public offering) have taken place globally, though the segment has been functioning for the past two decades,” he says. He adds that while healthcare and education ventures in this space are more established, others are yet to gain a stronghold. Lok Capital has US $ 90 million of assets spread over two funds. While fund-I has seen an investment in nine companies for US $ 22 million emphasising on financial inclusion, fund-II is still in its early stages having invested in one company and will be looking to invest in another 10 to 12 companies. The second fund will focus on the spaces of healthcare and education, which include skill and vocational training institutes, besides financial inclusion.

Scaling challenges

This September, Lok Capital had invested US $ 3 million in Bengaluru-based Rural Shores Business Services Pvt. Ltd. (Rural Shores), a rural business process outsourcing venture. The company will use the funds to expand its management bandwidth and improve its technology. Currently, Rural Shores has 10 centres in seven states, situated in rural regions where the population is less than 20,000 people. It now employs over 1,000 people since incorporating its first centre in Bagepalli, Karnataka in 2009. “Our business model of bringing jobs to rural areas worked and helped us scale fast,” says Murali Vullaganti, co-founder and chief executive officer, Rural Shores. The company now wants to set up another 10 centres in the next 10 months. But this process of scaling up comes with its set of challenges. Vullaganti says that every time the company decides to start a centre in a new location, there is the problem of attracting talent. “People are sceptical as they have never heard of us before. We have to convince the first batch, but after that, it becomes easier as they see how we benefit them,” he adds. Rural Shores’ expansion plan also signifies the demand in the industry for such talent and the need to go beyond the supply saturation in cities.

According to Vasishth, the challenges for scaling up for social ventures are both at the macro and micro level. “Scaling up does take time since there are structural issues like the size of the company. Attracting talent is not easy either,” he adds.

The road ahead

“There is very little venture capital going into companies that focus on bottom of the pyramid (BoP), who are people earning less than US $2/day and they constitute 25 per cent of India,” says Jayant Sinha, managing director, Omidyar Network India Advisors (Omidyar), a philanthropic fund that invests in for-profit social ventures and issues grants for not-for-profit social ventures. Omidyar will be investing US $ 100 million – 200 million in the next few years in India. He believes the main challenges for-profit companies targeting BoP face in sustaining long-term growth are cost-effective distribution, obtaining working capital, asset-backed financing (financing a project with 100 per cent equity, which is expensive) and the lack of talent.

Dr. Ashwin Naik of Vaatsalya Healthcare (Vaatsalya) does agree to some of those challenges. Present in 14 different districts with 800 beds, Vaatsalya employs 1,400 people. “For a healthcare facility like Vaatsalya that targets rural regions, there needs to be an ecosystem in place every time we choose a location to set up a facility,” says Naik. That ecosystem refers to skilled talent such as nurses, blood banks, local infrastructure and the jurisdiction of local bodies. Vaatsalya has a 22-point checklist that outlines the kind of locations it can scale up and Naik is clear that it includes Tier – II and III towns as smaller towns cannot afford its services.

Though the problem of attrition and migration is present, both Vullaganti and Naik believe that is reversing. “By providing opportunities in their area, many of them choose to live with their families. Also, we provide ground level support for corporate companies to reach out to their Bhaarat consumers,” affirms Vullaganti. According to Naik, he sees attrition with outside talent but not so much with the local people. “Hence, we try to balance the number of local and outside recruits,” he adds.

Living up to market expectations

Vaatsalya has received funding from Aavishkaar, Seedfund, Oasis Fund and Aquarius India Fund, and it is now targeting a turnover of Rs. 50 crore with a 36 per cent top line growth this fiscal. Naik believes there is no right time to approach investors unless there is considerable traction from customers. “It is harder for social enterprises to obtain funding due to the new geographies and new business models they are working to establish. But it definitely helps with the new class of such social funds,” he says. Naik believes that while social funds expect the same ROI (return on investment) as other VCs, the time frame is longer. “Expecting the market rate is reasonable else businesses will not have that focus,” he adds. Sinha also reiterates that point. “ROIs often differ with each business and yes, VCs do expect the market rate. Businesses that do not live up to the market return often find it difficult to scale up.”

Rural Shores, which hopes to become profitable by mid-2012, believes social funds expect less ROI compared to regular VCs. “If normal VCs expect about 25 per cent ROI, social VCs would probably expect about 15 per cent – 18 per cent and their patience levels are also more,” says Vullaganti. He hopes that Rural Shores will be present in each of the 500 districts in India in the next 10 years. Mehta believes since there are higher risks involved for social ventures due to the nature of geography they work in, a suitable ROI is not easy to establish. “Social funds should be flexible with the time period. Our theory so far is that if founders are focussed on giving financial and social inclusion, and make a sound business proposition around it, then they will definitely be able to sustain,” he concludes.


SOME CHALLENGES SOCIAL ENTERPRISES FACE:

  • Attracting talent
  • Not much social capital
  • Rural execution site
  • Innovating business models
  • Cost-effective distribution network
  • Obtaining working capital
  • Asset-backed financing